The arrest of mega-investor Michael Calvey in Moscow once again shocked the world of business. Why are people so surprised, asks Andrey Movchan of Carnegie Center Moscow. After the lawlessness of the mid-1990s, many hoped that a system of laws and rules to protect business (and everyone else) from arbitrariness would emerge. No way: the interest group that is furthest from honest business and society won the battle and made arbitrariness the guarantee of its position.

calvey1 michaelMichael Calvey of Baring Vostok in custody in Russia (picture Sputnik)

by Andrey Movchan

There are many reasons why I cannot believe that the private equity firm Baring Vostok and its U.S. founder Michael Calvey committed the fraud of which they stand accused, and personal acquaintance with people involved in this case is only one of them.

I have been following the Baring Vostok fund since the late 1990s—more or less since its very beginning—and know many details of its business, as well as a lot of people from both the fund and the companies in which it invested. In addition to the best known of those, the internet giant Yandex (which would never have existed if it hadn’t been for the fund), there are another 20 or so companies that Baring Vostok and Calvey made in Russia. Without them, many industries would be worse off, the culture of investment in Russia would not be what it is, and many good things would not have happened. 

The context of the situation is obvious, and the accusations are ludicrous, especially knowing the fund. Calvey and several of his colleagues are accused of embezzling funds from Vostochny Bank, which is majority owned by Baring, by selling another company in which they owned a controlling stake to Vostochny at an inflated price.

I’d be willing to bet anything that the sale contract was lengthy and contained numerous covenants, and certainly a clause on responsibility for providing untrue information. The bank had previously provided the company in question with financing, so how could the accused have given spurious financial records, when the bank would have already assessed the company? The bank could have asked for financial records, as could the central bank. And even if the information provided really was false, then the bank could have gone straight to the arbitration court to demand the annulment of the contract and the return of funds on the basis that the information provided was incorrect. 

So where is the arbitration court ruling? Why are investigators demonstrating such vigor, taking the accused into custody and ordering them to be held there for the next two months? Could it be that they have been paid to do so? We know that this happens, and we also know who the initiator is of this case: a minority shareholder in Vostochny, Sherzod Yusupov. And sure enough, a shareholder conflict between Calvey versus Yusupov and another (bigger) minority shareholder, Artem Avetisyan, is currently the subject of international arbitration proceedings in London. Now Yusupov has taken his complaint to Russia’s Federal Security Service (FSB), presumably at the behest of Avetisyan, who is known to be close friends with the son of Russia’s Security Council secretary and former FSB director, Nikolai Patrushev.

Not an isolated incident

This is hardly an isolated incident. Thousands of businessmen here have met the same fate, and thousands of businesses have changed ownership in a similar way. The only surprising aspect really is the senior level of the arrested foreigner (Calvey is one of Russia’s best-known private equity investors and has been working in the country for decades). But this means nothing in today’s Russia, unless of course a foreigner happens to have a distant relative who was an FSB colonel.

Russia long ago crossed the line beyond which any action capable of leading to a commercial or political conflict is toxic unless you have a reliable protector in the feudal pyramid—and can there even be a reliable protector in such a pyramid? Ultimately, everything built in this country is a sunk cost, non-returnable expenses, since anyone with any power could suddenly develop a commercial or social interest in it at any time. 

'Arbitrariness as the basis of the state is universally accepted'

The country has no institutions for the protection of rights, nor even demand for such institutions. This state is nothing other than arbitrariness, lawlessness, a free-for-all, and if it is so far limited, that is simply because of inertia, and certainly not because of the existence of any objective limitations. After the lawlessness of the mid-1990s in Russia, many hoped that competition between various groups of the elite would force them to create a system of laws and rules to protect them (and everyone else) from arbitrariness. But it didn’t turn out that way. Instead, one of the groups—the one furthest from both honest business and from society—won the battle and made arbitrariness the guarantee of its position. In turn, that group’s representatives themselves have become hostages of the arbitrary system: its victims have included major oligarchs, ministers, and former “friends” who went too far.

calvey michael baring in custody

What surprises me the most is the reaction of so-called liberals, whether loyal to the system or genuine liberals. As with one voice, they are all saying the same three things: 1) Calvey and Baring Vostok are not just anyone, they are major investors in Russia; they have done so much for the country, they can’t be sent to prison! 2) The authorities organize an investment forum in Sochi with one hand, and imprison the management of Baring Vostok with the other: this is sheer stupidity and wrong. 3) Now we won’t see any foreign investment; the authorities have buried the direct investment market in Russia, how could they? 

There is no law

All three sentiments, while outwardly appearing to express opposition to the authorities, in actual fact are entirely in keeping with the spirit of arbitrariness that abounds in this country today. Both these 'liberals' and the authorities have the same way of thinking: there is no law, nor is it necessary. Important people — people who are needed — should be treated nicely, with consideration, while disposable, irksome people can be treated any way at all. In the public space, the concept of arbitrariness as the basis of the state is universally accepted, and the only arguments are over who deserves to be its victim. 

To write that Calvey’s arrest could cause those doing business in Russia to stop and wonder whether the risks are too great is an insult to their intelligence. No doubt they have all understood perfectly for many years now that over their heads hangs the sword of our Lady Justice, which has long been sold to the highest bidder. Like Calvey, they all have their reasons for taking that risk, and in this they are not unique. In Russia today, and in other countries where lawlessness prevails, there are businessmen and foreign investors who were there yesterday and are still there today.

People have a tendency to underestimate risks; overestimate their strength, luck, and position; and harbor illusions regarding their ability to protect themselves from threats. To top it all off, investments that have already been made, businesses that have been built, and realized projects all become an anchor: to accept losses and appear a coward is psychologically much harder than ignoring the danger.

These stereotypes have truth to them, and more importantly, belief in them is inherent to our cynical state. Back in 2004, six months after the dramatic arrest of Yukos head Mikhail Khodorkovsky, in response to my words that Russia would lose foreign investors if the oil company was bankrupted, one senior official said: “Investors are like pigeons on the barn floor: if you kick one of them, the others will take flight, circle a couple of times, make some noise, and then land again. And what do we need them for anyway—so they can leave a mess everywhere and take our grain?”

It’s true that investors have a short memory. And it’s also true that Russia today has no interest in them.